{"id":155353,"date":"2023-07-17T11:10:59","date_gmt":"2023-07-17T17:10:59","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=155353"},"modified":"2024-02-27T12:00:02","modified_gmt":"2024-02-27T19:00:02","slug":"what-documents-do-you-need-for-a-dscr-loan","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/what-documents-do-you-need-for-a-dscr-loan","title":{"rendered":"What Documents Do You Need for a DSCR Loan?"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC6751505848\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n\n<p class=\"wp-block-paragraph\"><em>This article is presented by Easy Street Capital. Read our&nbsp;<a href=\"https:\/\/www.biggerpockets.com\/editorial-guidelines\" target=\"_blank\" rel=\"noreferrer noopener\">editorial guidelines<\/a>&nbsp;for more information.<\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">DSCR loans, while still a relatively new product, continue to expand in use and popularity for investors looking to achieve financial freedom through real estate. Throughout 2023, we have published several articles on DSCR loans, introducing the BiggerPockets community to how&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/dscr-loans-advanced-strategies\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">interest rates and terms<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;are determined, giving&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/questions-and-answers-about-dscr-loans\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">answers to<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;frequently&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/eight-questions-and-answers-to-dcsr-loans\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">asked questions<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;about DSCR loans and talking about exciting new developments and expansions of the product, including DSCR loans for five- to 10-unit&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/multifamily-dscr-loans\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">multifamily properties<\/span><\/a><span data-preserver-spaces=\"true\">.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">This article will cover another big aspect of DSCR loans\u2013specifically, what documents you will be expected to provide once you have decided to go with a DSCR loan.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">One of the most enticing aspects of DSCR loans for investors is the lower documentation, paperwork, and overall \u201chassle\u201d when compared to more traditional lending, including conventional and bank options. However, DSCR Loans should not be considered \u201cno doc\u201d loans\u2013they&nbsp;<\/span><em><span data-preserver-spaces=\"true\">do&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">include a well-thought-out underwriting process and meaningful \u201ccommon-sense\u201d documentation requirements as well. Sometimes people can be misinformed, thinking these are loosely originated mortgage loans akin to the \u201c<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.investopedia.com\/terms\/n\/ninja-loan.asp\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">NINJA<\/span><\/a><span data-preserver-spaces=\"true\">\u201d (no income, no job, and no assets) loans that were common in the early 2000s and helped lead to the last real estate crash.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">After reading this guide, you should be both well-equipped to know what to expect in the DSCR loan underwriting process&nbsp;<\/span><em><span data-preserver-spaces=\"true\">and<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;be able to dispel any myths about DSCR loans being a repeat of the poorly documented \u201cno doc\u201d loans of the past.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">What are DSCR Loans?<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">While there isn\u2019t an exact, commonly agreed-upon definition out there, here is a handy definition for this specific loan product:<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><em><span data-preserver-spaces=\"true\">DSCR loans are mortgage loans secured by residential real estate turnkey properties, strictly used for a business purpose and underwritten primarily based on the property.<\/span><\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Important note: DSCR loans refer to the specific loan type, and the \u201cDSCR ratio\u201d (debt service coverage ratio) is a&nbsp;<\/span><em><span data-preserver-spaces=\"true\">metric<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;used for underwriting and evaluating these loans (and other loans), but the metric and ratio itself are distinct things versus what is referred to as \u201cDSCR loans.\u201d<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Some key things to note in the definition:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">DSCR loans are secured loans (meaning that there is collateral that the lender can take if the borrower doesn\u2019t pay back the debt). They are also mortgage loans, i.e., secured loans for which the secured collateral is real estate.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">DSCR loans cover residential real estate properties, not commercial real estate properties. So investment properties that are commercial in nature (think office buildings, retail strip centers, etc.) cannot use DSCR loans. They can be leveraged with commercial real estate loans that use the DSCR metric for evaluation; however, these are not under the \u201cDSCR loan\u201d product bucket.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">DSCR loans are for \u201cbusiness purpose,\u201d only meaning that the owner of the property&nbsp;<\/span><em><span data-preserver-spaces=\"true\">can not live in the property under any circumstances<\/span><\/em><span data-preserver-spaces=\"true\">. These loans are strictly for investment properties where the property is owned and operated for business purpose and rented out for income. Additionally, for DSCR loans for which the purpose is a \u201ccash-out refinance,\u201d the use of the cash-out proceeds&nbsp;<\/span><em><span data-preserver-spaces=\"true\">must also be used for a business purpose<\/span><\/em><span data-preserver-spaces=\"true\">. Commonly, these proceeds are used for further real estate investment or costs related to the borrower\u2019s real estate business and strictly can\u2018t be used for personal uses, such as paying off personal credit cards or any nonbusiness expense.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">DSCR loans are \u201cprimarily based on the property,\u201d meaning that the lender evaluates and qualifies the deal&nbsp;<\/span><em><span data-preserver-spaces=\"true\">mostly but not completely<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;based on the property\u2019s investment potential. This is a common misconception where people sometimes assume DSCR loans are&nbsp;<\/span><em><span data-preserver-spaces=\"true\">purely&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">based on the asset. DSCR lenders will run personal credit (which, along with LTV and DSCR, is among the&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/dscr-loans-what-are-they\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">three biggest factors<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;determining your rate and terms) and typically require three to six months of PITIA \u201creserves\u201d in liquid assets. The rest of the documentation and underwriting will be based on the asset, but it&#8217;s important to remember that qualification isn\u2019t 100% based on the property. Your credit and some basic liquid assets matter, too.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Finally, DSCR loans are for \u201cturnkey\u201d properties only, meaning any property needing any significant renovations or rehab is not going to qualify, and you will likely need to explore&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/loans\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">hard money<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;options instead.<\/span><\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">DSCR Loans\u2014Not \u201cNo Doc\u201d and Not \u201cNINJA\u201d<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">One of the commonly agreed-upon drivers of the 2008 real estate crash was loans with poor underwriting standards to unqualified borrowers. It was common to see inexperienced borrowers qualify for and amass many loans with almost no money down and exotic loan structures. Further, many qualification standards were low, not requiring proof of income or much in the way of evaluating whether the borrower was going to be able to pay the loan back.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Because of this, sometimes people hear about DSCR loans, which are best known for being based&nbsp;<\/span><em><span data-preserver-spaces=\"true\">primarily<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;on the asset and not requiring or evaluating W2 income or DTI, and associate them with the poorly constructed loans of the past.&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">As the rest of this article will demonstrate, this is misleading, as DSCR lenders will require common-sense documents to properly underwrite a file and evaluate and limit risk. Further, DSCR loans are much more conservative, for example, generally limiting LTVs to no more than 80%, requiring&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/singlefamily.fanniemae.com\/media\/23286\/display\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">strict rules around third-party appraisals for valuations<\/span><\/a><span data-preserver-spaces=\"true\">, and conservatively evaluating how each property will perform as a rental.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Additionally, DSCR loans generally have none of the confusing and exotic loan structures of the past, where borrowers were faced with quick and potentially rapid increases in interest rates. Almost all DSCR loans are fixed-rate, 30-year mortgages, and the ones that aren\u2019t typically fixed for at least five years and have built-in limits against rates increasing too much and too quickly.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">DSCR Loan Documentation Requirements<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">The following is a brief checklist of the documents that you will be expected to provide when going through the process of obtaining a DSCR loan. It is important to remember that DSCR lenders are all following the 100% exact same guidelines and requirements, such as conventional lenders originating Fannie Mae-qualified loans.&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">DSCR lenders typically have mostly the same guidelines, but each are a private lender and has differences. Additionally, not all DSCR loans will have the exact same document requirements based on the deal itself and won\u2019t be applicable. Some examples of this are \u201centity\u201d documents, which are only required if the loan is taken in the name of an entity, like an LLC.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Application<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">The DSCR Loan process typically starts with the application. Some DSCR lenders will use the standard&nbsp;&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/singlefamily.fanniemae.com\/media\/7896\/display\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Fannie Mae Form 1003<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;application. However, this is designed for conventional loans (including normal owner-occupied loans) and includes lots of questions and information not required by DSCR lenders.&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Several DSCR lenders, especially ones focused solely on DSCR loans and financing real estate investors, will have customized applications that have questions and fields only specifically needed for DSCR loan qualification. These custom-built applications are typically a few pages and take approximately 15 minutes to complete.&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Typical items included are questions about the property, real estate investing experience, financial profile, the entity (if borrowing through an LLC), and optional demographic information.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">While all of this information will be checked and verified during the underwriting process, and rough estimates are generally OK, it is very important to be truthful on the application. As a DSCR lender finding evidence of misstatements on the application later in the process can have serious consequences.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Credit authorization<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">This document authorizes the DSCR lender to pull a credit report for the guarantors on the loan. Note that mortgage lenders use a slightly different credit report with a focus on other real estate debt history than others, so your score with a DSCR lender may be slightly different from what you would find in other places.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Bank statements<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Generally, DSCR lenders will require two months of bank statements to prove minimal liquid asset \u201creserves,\u201d generally in the amount of three to six months of PITIA payments. While these loans must be used for business purposes, it is perfectly fine and acceptable for the individual borrower to pay debt service from personal funds if needed. This can occur if the property experiences vacancy or turnover or maybe is a short-term rental in a seasonal market, and some months bring in light amounts. The liquid asset reserves provide a \u201ccushion\u201d for these cases.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Most DSCR lenders will also allow for retirement accounts or stock and bond portfolios to satisfy this requirement, often with a 20% or so \u201chaircut\u201d of the amount to account for the lower liquidity and value risk.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Property insurance&nbsp;<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">DSCR lenders will require that the property is properly insured against potential damage and destruction, typically at a minimum of the loan amount or replacement cost. This ensures that if the property is destroyed, the DSCR lender can recover the funds from the loan in a payout of no less than the principal balance. Flood insurance to this amount is also required if the property lies in a federally designated flood zone.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Leases<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">If the property is leased as a long-term rental, copies of the leases are required to be provided, and they must be in proper order (clearly signed with rents and terms fully clarified). One thing to watch out for is when purchasing a property that is currently leased out: things typically run the smoothest when the seller can provide these leases quickly.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Short-term rental history<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">If the property has been utilized as a short-term rental, the last 12 months of bookings and receipts are typically required by the DSCR lender. Usually, these can be downloaded and sent fairly easily from short-term rental platforms such as Airbnb and VRBO.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Entity documents&nbsp;<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">These are not applicable if you are borrowing as an individual but are required if, like many investors, you choose to set up an LLC. For borrowers who go this route, a few documents are typically required. It will often depend on the state of incorporation.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Typical entity documents required by DSCR lenders include:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">Certificates of Good Standing<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Certificate of Formation<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Articles of Organization<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Operating Agreement<\/span><\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Renovation documentation<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">For borrowers who follow the BRRRR method and use DSCR loans for a quick cash-out refinance, documentation of all the renovation work is often required. These will typically include receipts, invoices, and work orders from the rehab work on the property.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Conclusion<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">While there are a few more documents that go into the loan file, these are obtained by the DSCR lender and don\u2019t have to be provided by the borrower. These include an appraisal, appraisal review, and title insurance.&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Overall, DSCR loans are a great product because the documentation requirements are limited and reasonable, ensuring solid underwriting and protecting against risk and market meltdown while not being a hassle and nightmare of paperwork.<\/span><\/p>\n\n\n\n<div class=\"wp-block-group border border-gray-200 p-6 rounded-md has-slate-50-background-color has-background\"><div class=\"wp-block-group__inner-container is-layout-flow wp-block-group-is-layout-flow\">\n    \n  <div \n    id=\"segemnt-view-event-block_624f52525847f\" \n    class=\"  \"\n    x-intersect:enter.once=\"\n      analytics.track('Easy Street Capital Blog Sponsor View', {\n        referrer: 'https:\/\/www.biggerpockets.com\/blog\/what-documents-do-you-need-for-a-dscr-loan',\n              })\n    \">\n    \n  <\/div>\n  \n\n\n<h3 class=\"wp-block-heading has-text-align-left mt-0\"><strong>This article is presented by Easy Street Capital<\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-image size-large is-resized\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/01\/Easy-Street-Capital-Logo-1024x1024.png\" alt=\"Easy street capital logo\" class=\"wp-image-146472\" style=\"width:232px;height:217px\" width=\"232\" height=\"217\" title=\"\"><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">Easy Street Capital is a private real estate lender headquartered in Austin, Texas, serving real estate investors around the country. Defined by an experienced team and innovative loan programs, Easy Street Capital is the ideal financing partner for real estate investors of all experience levels and specialties.&nbsp;Whether an investor is fixing and flipping, financing a cash-flowing rental, or building ground-up, we have a solution&nbsp;to fit those needs.<\/p>\n\n\n\n<div id=button-custom-event-block_63c9a33918e17 class='button-custom-event'>\n      <a href=\"https:\/\/www.easystreetcap.com\/dscr-loans-guide\/\" x-on:click=\"window.analytics.track(&#039;Sponsored Blog CTA Click&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/what-documents-do-you-need-for-a-dscr-loan&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\" rel=\"noopener\">Learn More About Easy Street Capital<\/a>\n  <\/div>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\"><\/div>\n<\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p>DSCR loans are a powerful way to build your portfolio, but you&#8217;ll need important documentation to get approved. Here&#8217;s what you need to know.<\/p>\n","protected":false},"author":613643,"featured_media":155356,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7402,7119],"tags":[],"class_list":["post-155353","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-traditional-loans","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/155353","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613643"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=155353"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/155353\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/155356"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=155353"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=155353"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=155353"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}